What are the Advantages of ESOP?


Advantages of ESOP :

1.      Employee Stock Ownership Plan (ESOP) is an employee benefit plan. The scheme provides employees the ownership of stocks in the company.

2.      Ownership : It is one of the profit sharing plans. Employers have the benefit to use the ESOPs as a tool to fetch loans from a financial institute. It also provides for tax benefits to the employers.

3.      Retirement benefit : Organizations strategically plan the ESOPs and make arrangements for the purpose.

4.      They make annual contributions in a special trust set up for ESOPs. An employee is eligible for the ESOPs only after he/she has completed 1000 hours within a year of service. After completing 10 years of service in an organization or reaching the age of 55, an employee should be given the opportunity to diversify his / her share up to 25% of the total value of ESOPs. Law has also provided an amendment for the employees who have attained the age of 60 and their ESOP shares are allotted after December 31, 1986. The amendment profiles those employees with an option to diversify their shares up to 50%.

5.      Capital Appreciation : Companies sell some or all of their equity to employees and by doing so converts corporate and personal taxes into tax-free capital appreciation. This allows the owner to sell 100% of his or her company, get money out tax-free and still maintain control of the company.

6.      Incentive Based Retirement. Provides a cost-effective plan to motivate employees. After all, who works harder, owners or employees, is million dollar question.

7.      Tax rebate and Tax Advantages : Enables tax advantaged purchasing of stock of a retiring company owner. With this purpose, a company owner may sell their shares to the ESOP and incur no taxable gain on the sale. A company owner can sell all or some of the company to the employees cost free. Owners who sell 30% or more of their company to an ESOP are allowed to “roll-over” the proceeds into other securities and defer taxation on the gain.

8.      Company reduces its tax liability. A company can reduce the corporate income taxes and increase its cash flow and net worth by simply issuing treasury stock or newly issued stock to its ESOP

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